In this guest post, Jack Bedell-Pearce, managing director of service provider 4D Data Centres, shares his thoughts on the role colocation can play in helping cryptocurrency miners boost their profits.

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Despite recent fluctuations and a downturn in value, Bitcoin remains one of the most popular cryptocurrencies.

While many see the potential profits in the likes of Ethereum, Ripple, and other up and coming cryptocurrencies, many more see mining them as a risky, and potentially unprofitable venture.

As the value of cryptocurrencies has increased over time, so have the challenges associated with mining them.

That’s because all cryptocurrencies rely on blockchain: a distributed, peer-to-peer ledger technology that ensures cryptocurrency transactions are validated and secure.

Miners add new blocks to the chain using mining software to identify Secure Hash Algorithms – and in return, they receive cryptocurrency units.

Because miners are effectively competing to be the first to solve a particular Secure Hash Algorithm, budding miners can encounter challenges, because many cryptocurrencies limit how many units are in circulation at any time.

Furthermore, the mining scene for popular cryptocurrencies can be very competitive, making it difficult to get started. And, while less popular currencies may be simpler to mine, there’s no guarantee they will hold their value long-term.

Another key concern is securing enough energy, space and compute resources to power their cryptocurrency mining software in the first place.

Calculating the cost of cryptocurrency

Firstly, all miners need hardware to power their mining applications. Some use a conventional CPU, others favour a customised graphics processor or field-gate programmable array. More recently some miners have started using pre-programmed, application-specific integrated circuits.

Whatever hardware you decide to use, you’ll need to carefully consider how it balances cost and flexibility, and how this stacks up against potential profits.

While mining hardware often has a small physical footprint, the GPUs and ASICs they contain consume vast amounts of power. And when you factor in the additional power cost of keeping the hardware cool, it’s a significant outlay that can cut deep into potential profits.

For example, the bitcoin network currently uses approximately 16TWh of electricity per year, accounting for 0.08% of the world’s energy consumption, and the energy cost of a single transaction could power five households for a day.

Because Secure Hash Algorithms must be submitted to the cryptocurrency network, it’s important for your mining operation to have a stable network connection.

Having a low-latency network connection give users the best possible chance to solve a block and mine the cryptocurrency before anyone else can.

Significant players in the mining community have also been the targets of distributed denial of service (DDoS) attacks in the past. So, if you’re planning on mining seriously, you’ll want to ensure you have a secure network with protective measures in place to keep downtime to a minimum.

Similarly, physical security should also be a key concern if you plan on mining seriously. Without a secure site for keeping your mining hardware safe, you run the risk of theft.

Combining colocation and cryptocurrency

All of these mining requirements add up to a significant investment. While the costs can be substantial, the opportunity for generating revenue is higher than ever – and it’s an opportunity that many will want to capitalise on before the mining market becomes even more saturated.

So how can you cut the costs, reduce the risks of mining, and make the most of the cryptocurrency opportunity?

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